Local banks, human capital, and regional development in India and Brazil

Growth, like politics, is local. The determinants of local growth are complex, involving agglomeration, migration, local factors and infrastructure, history, natural endowments, plus all the rest of multitude of factors which have been found to be important in cross country studies. Across localities or regions within a country, one often sees income disparities that are greater than those that exist between the richest and poorest countries in the world. In this dissertation I assess the factors which drive growth at the city or district level focusing on the role of the presence of local banks and of adequate human capital.;In Chapter 1, using a unique sample of GDP data for districts in India, I investigate the finance-growth nexus at sub-national level. I apply a novel method to instrument for financial development, and find that lack of financial development is a significant barrier to growth, but that the relationship between finance and growth may be non-linear.;For the districts in my sample, moving from the 75th percentile of credit/GDP to the 25th implies an average loss of 4% growth over the decade. This result is not driven by the usual causes of financial underdevelopment---i.e. weak investor legal protections or financial repression---since these apply only at the national level and do not vary by district. The data supports the hypothesis that local banking industry frictions are the culprit.;I go on to show that human capital deepening can reduce the effect of the financial constraint, and may act as a substitute to bank-intermediated finance in the growth process. In a district at the 25th literacy percentile, the implied growth loss due to a constrained banking sector is twice as large as in a district at the 75th literacy percentile.;In Chapter 2, I extend recent theoretical models of growth via adoption by adding human capital, financial constraints, and differential access to formal credit to be consistent with my empirical results. The model shows how human capital deepening can reduce financial constraints to growth by empowering firms which are outside the financial system: typically small and medium sized enterprises.;The final chapter analyzes the patterns of growth, sectoral specialization, and changes in sectoral composition in Brazilian cities (municipios) between 1999 and 2005. I focus specifically on the role of human capital and the local banking sector in promoting growth and facilitating changes in the sectoral mix of production between the agricultural, industrial, and service sectors.;I find that local financial development and human capital are significant determinants of the growth of Brazilian cities in some specifications. Further, the relationships seem to become stronger when instrumented with lagged measures of financial sector capacity and school attendance.;I also find that growth of the share of the service sector was associated with slower growth in GDP per capita while growth of the share of the industrial sector associated with faster per capita growth. Additionally, while the industrial sector does not seem to depend on the banking sector to grow, the service sector does. This fact likely reflects government administered credit in the industrial sector (e.g. to export oriented SMEs) which is not mediated by banks or of a natural independence from the local banking sector through scale, high levels of fixed assets, or other considerations.